New Delhi, Jan 29: S&P Global Ratings Tuesday said corporate activities that are designed to support the government coffers — such as share buyback — by PSUs are ‘credit negative’ for such entities.
In the past three months, 10 public sector undertakings (PSUs) have announced or executed buybacks for a cumulative amount of Rs 15,000 crore, which will count toward the government’s target of Rs 80,000 crore from disinvestment of state-owned entities.
“S&P Global Ratings foresees credit risks at Indian SOEs (state-owned enterprises) from corporate activity designed to support the Indian government’s budgetary coffers,” the US-based rating agency said in a statement.
The impact on the respective companies can vary depending on the size of cash outflow, it added.
“Extracting cash from SOEs decreases their financial flexibility in a stress scenario, which — at least over the short term — is credit negative at the firm level,” S&P said.
It said while extraction of existing excess capital in the form of dividends generally has an impact only on the short-term business of SOEs as dividends are discretionary and can be scaled back if future profitability is low.
“In contrast, we believe that debt-funded share buybacks, mergers or acquisitions have longer-term implications. Further, reduced government linkages to divested firms may lower the likelihood of government support in a stress scenario,” S&P said.
The share buybacks announced so far, including the Rs 4,000-crore offering at Oil and Natural Gas Corp (ONGC), are manageable within the credit profiles of respective PSUs, it added.
“However, the risk of a large and disruptive payout increases as the government runs out of time on its SOE stake sale target for the financial year,” S&P said.
S&P said Power Finance Corporation (PFC) capitalisation is under pressure due to the government’s direction to acquire REC, another SOE that finances the country’s power sector.